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Clayton: Regulation Best Interest Would Allow for Some Incentives

The battle over the Securities and Exchange Commission’s Regulation Best Interest proposal continued Tuesday, as Chairman Jay Clayton received more pushback from Democratic Senators Elizabeth Warren (D-Mass.) and Catherine Marie Cortez Masto (D-Nev.).

During a hearing for the Senate Committee on Banking, Housing and Urban Affairs, Cortez Masto, whose state has passed its own fiduciary standard, questioned Clayton on whether brokers can create sales incentives under the proposed rule. Some sales activities, such as growing assets, should be compensated via incentives, he responded.

“You would think you would compensate somebody for bringing in new customers and growing assets, just like what happens in the investment advisory space,” he said.

Yet Clayton personally believes specific sales contests around highly pressured products would be inconsistent with a best interest standard.

When asked by Cortez Masto about whether brokers can create bonuses for recommending certain products under the proposal, Clayton said it depends on the structure.

“I’ve always found that when you put those incentives there, it really erodes looking out for the best interest of the client, and that’s my concern,” Cortez Masto said.

Warren criticized Clayton for not using the same language as the investment advisor’s fiduciary standard. The SEC’s Investor Advisory Committee recently recommended changes to the proposal, including that the rule be a fiduciary standard.

“One option would simply be to make brokers subject to the same fiduciary standard that investment advisors are subject to, but you didn’t do that,” Warren said. “Instead the SEC’s proposal says that brokers have to act in the best interest of the client, but then you never defined what ‘best interest’ actually means.”

“Is there a specific definition that says, ‘this is what it means?’ No, but there’s no specific definition that says, ‘This is what the investment advisor standard means,’” Clayton responded.

Under the advisor standard, he argues, advisors are allowed to have conflicts, with informed consent. “That’s not well-understood.”

The two standards use the same “bedrock principle,” that an advisor can’t put their interest ahead of the client’s, he said.

“Well, if it’s the same, just use the same words,” Warren said.

“We may do that,” Clayton responded.

“We need a clear uniform fiduciary standard for advisors and brokers,” Warren said. “It’s the only way to make sure that people who are trying to save for their kids’ college education or their retirement are getting the advice that is best for them, instead of what’s most profitable for the person giving the advice.”